Oil prices and Mexico’s exchange rates in North America

Abstract

Evidence indicates that since the early 2000s, the central bank in Mexico has been able to implement a solid and credible monetary policy, which has resulted in maintaining the purchasing power of the Mexican peso. Motivated by such evidence and the fact that Mexico (like Canada and the US) is a major oil-producing country, we set out to examine the dynamic relationship among oil prices and Mexico-Canada and Mexico-US exchange rates for 2000–2020. Our findings indicate that (i) these series are co-integrated and possess a long-run equilibrium relationship, (ii) oil prices asymmetrically respond to eliminate disequilibrium and (iii) both Mexico-Canada and Mexico-US exchange rates are weakly exogenous. Such findings point to the success of the central bank in largely shielding Mexico’s exchange rates from oil price fluctuations in the NAFTA region.